Journal of Computational Finance

Risk.net

Pricing American-style options by Monte Carlo simulation: alternatives to ordinary least squares

Stathis Tompaidis and ChunyuYang

ABSTRACT

We compare OLS regression against several alternatives and find that OLS regression underperforms methods that penalize the size of coefficient estimates when the number of simulation paths is small. Based on our findings, we recommend an alternative method based on a modification of the "matching projection pursuit" that we introduce in this paper.


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